In just a few short days, markets have taken some of the urgency off the table for the Federal Reserve to slash interest rates. Earlier in the week, there were even some calls for an emergency intermeeting rate cut. At the least, markets figured the Fed was a near-certainty to reduce benchmark rates by at least a half percentage point. Now? Market pricing points to about a coin flip between the probability of a quarter-point or half-point reduction as confidence has grown that the economy is not barreling toward a recession and the Fed hasn’t fallen perilously behind the economic curve. “I do continue to expect a slowdown that will induce the Federal Reserve to ease monetary policy, but the market reaction was the suspicion that suddenly we’ve tripped a switch and the economy is already in a contraction,” said Steven Wieting, chief economist and strategist at Citi Wealth. Though he expects to see a further slowdown in the labor market, Wieting said growth is being underpinned by fiscal stimulus while consumers are still in relatively good shape, “and those are not conditions where we tend to see recessions unless a new shock occurs.” A brief panic started Aug. 1 and lasted into the beginning of this week, fueled by an unexpected bump in layoffs and a weak ISM manufacturing reading. But a Labor Department report Thursday showed initial unemployment claims declined , and a separate ISM report this week pointed to stronger-than-expected growth in the services sector. Consequently, market pricing on Monday that had indicated an 85% chance of a 50 basis point cut in September switched to 54% by Friday, according to the CME Group’s FedWatch measure of 30-day fed funds futures contracts. Markets are still pricing in about a 68% chance of a full percentage point reduction by the end of 2024, but even that has receded from the near-certainty Monday of a 1.25-point move. Wharton professor Jeremy Siegel has been one of the loudest voices for aggressive Fed action, calling Monday for an emergency cut . But even he has softened his tone , now just encouraging Chair Jerome Powell and his colleagues to ease policy as quickly as possible, though an intermeeting move is no longer necessary. “There’s no way that he’s going to do that without things falling apart. I don’t think things are falling apart,” Siegel said in an interview Thursday. “As soon as they can get below 4%, the better.” The Fed has been holding its benchmark rate in a range between 5.25%-5.50% for more than a year. Powell and a few other central bank officials in recent days have indicated they are open to cuts , though they haven’t provided details on timing and magnitude.
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